Business Savvy: North Carolina Has Revamped its Business Court & Corporate Structure Rules

North Carolina continues to be cultivated into increasingly fertile ground in which sophisticated and complex businesses can flourish. Governor McCrory recently signed into law SL2014-102 (SB 853) (the “Act”), an act which began as an effort to modernize the procedures for complex business cases handled by the North Carolina Business Court, and which ultimately expanded to provide for internal corporate reorganizations using holding companies in a manner that has been compared to favorable provisions of Delaware law. The Act was introduced in May 2014 by Senators Rucho and Berringer as SB 853, A Bill to be entitled An Act To Modernize the Business Court by Making Technical, Clarifying, and Administrative Changes to the Procedures for Complex Business Cases, and was dubbed “The Business Court Modernization Act.” After several revisions by the Senate and House Committees, the House and Senate conferees resolved their differences with final amendments to the House Committee Substitute. On August 2, 2014, the General Assembly ratified the final Act entitled An Act to Modernize the Business Court by Making Technical, Clarifying, and Administrative Changes to the Procedures for Complex Business Cases, to Streamline the Process of Corporate Reorganization Utilizing Holding Companies, and to Establish a Business Court Modernization Subcommittee of the Joint Legislative Economic Development and Global Engagement Oversight Committee. Governor McCrory signed it into law on August 6, 2014. The majority of the key provisions of the Act, highlighted below, take effect on October 1, 2014.

Appeal of Right to the N.C. Supreme Court

SB 853 as introduced contained a provision that created an appeal of right to the North Carolina Supreme Court “from any final judgment in a case designated as a mandatory complex business case … or designated as a discretionary complex business case….” The 06.11.14 Senate Committee Substitute maintained this appeal of right from final judgments in complex business cases, but also modified the bill to create an appeal of right from any interlocutory order from the Business Court, which:

a. Affects a substantial right.

b. In effect determines the action and prevents a judgment from which an appeal might be taken.

c. Discontinues the action.

d. Grants or refuses a new trial.

The 07.01.14 House Committee Substitute and the final Act maintained both provisions, creating an appeal of right to the North Carolina Supreme Court from final judgments in complex business cases and from these four types of interlocutory orders.

Business Court Written Opinions

As introduced, SB 853 added the requirement that “[u]pon the final disposition of a complex business case, the presiding Business Court Judge shall issue a written opinion.” The requirement for a written opinion was expanded in the 06.11.14 Senate Committee Substitute to include not only orders finally disposing of cases, but also orders granting or denying motions under G.S. 1A-1, Rules 12 (Defenses or objections), 56 (Summary Judgment), 59 (New trials; amendment of judgments), or 60 (Relief from judgment or order). The 07.01.14 House Committee Substitute maintained the Senate Subcommittee provision as expanded. Subsequently, the House and Senate conferees made a final amendment to the provision which excluded orders “effecting a settlement agreement or jury verdict” from the written opinion requirement. The final Act requires a written opinion “in connection with any order granting or denying a motion under G.S. 1A-1, Rule 12, 56, 59, or 60, or any order finally disposing of a complex business case, other than an order effecting a settlement agreement or jury verdict.”

Designation of Complex Business Cases

The Act redefines the types of cases that any party may designate as a complex business case, as well as the types of cases that must be designated as a complex business case. The original version of SB 853 modified the types of cases that may be designated by either party to explicitly include certain disputes:

(6) commercial contract law actions involving an amount in controversy of at least $1,000,000.

The original version also removed explicit reference to actions involving intellectual property law, the Internet, e-commerce, and biotechnology. Based on the Senate and House Committee Substitutes and Amendments, the final Act includes the following notable changes to the original version of SB 853: (1) it added back in explicit references to intellectual property disputes, expanding upon the specific types of such disputes that may be designated, (2) it requires that both parties in $1,000,000+ contract disputes consent to the designation, and (3) it explicitly carves out from the trade secret actions that may be designated “disputes involving enforcement of a noncompetition or nonsolicitation covenant against an individual employee.”

The Act also requires that several types of cases must be designated as complex business cases. Most notably, if the amount in controversy equals or exceeds $5,000,000, it requires a designation in any of the categories of cases discussed above that could be designated by any party. In that instance, the party whose pleading caused the amount in controversy to equal or exceed $5,000,000 must make the designation.

Corporate Reorganization to Form Holding Company Structure

SB 853 did not contain any provisions regarding corporate restructuring when first introduced. The 06.11.14 Senate Committee Substitute added provisions to amend Article 11, Chapter 55 of the General Statutes to provide for mergers to effect holding company reorganizations. The provisions state that, unless required by articles of incorporation, “no vote of shareholders of a constituent corporation is required to authorize a merger with or into a single direct or indirect wholly-owned subsidiary of the constituent corporation” under certain circumstances. The final Act maintained provisions regarding the formation of holding company structures, which apply to corporations and limited liability companies. The holding company section of the Act was heralded by the North Carolina Chamber of Commerce as a measure that “provides an attractive business option that makes North Carolina more competitive to retain existing companies, attract new businesses and stimulate economic growth and job creation,” as it is modeled after the law in Delaware “which is considered to have the most advanced and flexible corporate statutes in the nation.”

Additional Provisions

The Act also includes provisions regarding court and notice-related costs, semi-annual reporting of each Business Court site’s activities, and the creation of a Subcommittee on Business Court Modernization within the Joint Legislative Economic Development and Global Engagement Oversight Committee to study the implementation and effects of the Act.

Suggested Provisions Not Included in Final Act

Several interesting provisions that were introduced during the process did not make the final cut, including:

The 06.11.14 Senate Committee Substitute added provisions to establish a three-judge panel to consider and rule upon challenges regarding the facial validity of Acts of the General Assembly based on the North Carolina or U.S. Constitutions. The 07.01.14 House Committee Substitute removed this provision.

The 07.01.14 House Committee Substitute added a provision entitled “Exclusive forum or venue provisions valid,” which provided that “[a] provision in the articles of incorporation or bylaws of a corporation that specifies a forum or venue in North Carolina as the exclusive forum or venue for litigation relating to the internal affairs of the corporation shall be valid and enforceable.” The House and Senate conferees removed this provision and modified the title of the Act to reflect this change.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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